With unemployment levels reaching a new high during the global pandemic, courts across the country have become increasingly reluctant to enforce non-compete agreements in employment contracts. As an example, a recent district court case, Robert Garcia v. USA Industries, Inc., demonstrates what may be a shift in Texas' formerly lenient approach to non-competes. There, the court granted the plaintiff's request for a temporary restraining order against the non-compete clause in his severance agreement, finding not only that there was inadequate consideration to enforce the non-compete provision, but that the provision itself was unreasonable. While this is only one case, in light of this shift in the interpretation of non-compete agreements as reflected in this decision, companies should ensure that their non-competes are reasonable as to scope and time, supported by adequate consideration, and narrowly tailored to protect the company's legitimate business interests so as to increase the chances of the agreement being upheld. This will only become more important as more and more states pass restrictive covenants legislation limiting what is permissible.
Non-Competes in Texas
Currently, Texas law, at least on paper, is fairly lenient toward the enforcement of non-compete agreements. The law reads:
A covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee. Tex. Bus. & Com. § 15.50(a).
However, the Garcia court's decision to grant a temporary restraining order ("TRO") prohibiting the former employer's enforcement of the employee's non-compete agreement suggests that Texas may be joining other states in heightening the level of scrutiny required to enforce a non-compete clause, at least in the context of employees who were let go during the pandemic.
In April 2020, Robert Garcia was terminated from his outside sales position with USA Industries, Inc. ("USAI") after twelve years of employment due to economic hardship related to the COVID-19 pandemic. Garcia's initial employment agreement contained a non-compete provision, as did his severance agreement. Specifically, the severance agreement contained the following language: "No Future Association. Employee waives any future association, employment, contractual relationship, or any other relationship of any kind with any Released Party and agrees not to apply to any Released Party for employment or a contractual relationship." The severance agreement also specified that any prior agreements related to unfair competition (i.e. the employment agreement) would remain intact.
After Garcia left USAI, he began working for Airtool Equipment Rental, Inc. ("Airtool") which has some product lines which compete with USAI. As a result, USAI sent Garcia a cease and desist letter and Airtool a letter reminding them of Garcia's contractual obligations. After receiving the letter, Airtool terminated Garcia.
Garcia then filed suit against USAI, alleging, among other things, that the non-compete agreement was unenforceable, and he sought a temporary restraining order, injunctive relief, and declaratory relief regarding the agreement. Notably, Garcia argued that the post-separation agreement not to compete was not supported by consideration and that the restrictions placed on him were greater than necessary to protect USAI's legitimate goodwill expectations. He also argued that the restrictions were overbroad as to scope, time, and geographical territory.
The court granted Garcia's application for a TRO, agreeing with Garcia that the non-compete clause in his severance agreement was not supported by sufficient consideration to be deemed enforceable. The court further agreed that the restrictions were both unreasonable and greater than necessary to protect USAI's legitimate goodwill expectations. Finally, the court noted that Garcia would likely be prevented from finding work in his area of expertise should USAI be allowed to continue contacting his prospective employers. The court has yet to reach a decision regarding the rest of Garcia's claims.
Takeaways
In general, courts have begun to look less and less favorably upon non-compete agreements, with several states proposing and/or enacting new legislation to heighten non-compete restrictions. As such, companies should ensure that their non-competes are carefully and narrowly drafted so as to increase the likelihood of their agreements being upheld. This requires drafting agreements that are reasonable as to scope and time, supported by adequate consideration, and narrowly tailored to protect the company's legitimate business interests. Additionally, employers should be mindful of the equitable considerations of seeking to enforce non-competes against employees who are laid off in poor economic environments, even if they are provided severance. However, even with these safeguards in place, companies should be prepared for the ever-increasing possibility that their non-competes may not be enforced at all and make adjustments within the workplace accordingly.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
